New Delhi, Feb 27 (PTI) Shares of NBFCs and microfinance institutions were in the limelight on Thursday after the Reserve Bank lowered risk weights for bank finance to NBFCs and microfinance loans, a move that will unlock more funds and boost credit.

Shares of CreditAccess Grameen surged 11.83 per cent, AU Small Finance Bank soared 6.26 per cent, Shriram Finance jumped 5.72 per cent, Ujjivan Small Finance Bank climbed 3.39 per cent, Bajaj Finance rallied 2.39 per cent and Poonawalla Fincorp went up by 2.21 per cent on the BSE.

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Benchmark equity indices ended flat. The 30-share BSE Sensex eked out marginal gains of 10.31 points or 0.01 per cent to settle at 74,612.43. The NSE Nifty slipped 2.50 points or 0.01 per cent to 22,545.05, registering its seventh day of decline.

The Reserve Bank on Tuesday lowered risk weights for bank finance to NBFCs and microfinance loans, a move that will unlock more funds and boost credit.

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A lower risk weight means that lenders need to set aside less funds as a safety net for consumer loans, implying an increase in their lending capacity.

Both NBFCs and microfinance institutions have witnessed a slow down in their lending after the central bank tightened lending norms by raising the risk weight in November 2023.

The risk weight on the exposures of commercial banks to NBFCs was increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent.

"On a review, it has been decided to restore the risk weights applicable to such exposures...," the RBI said in circular.

In another circular, the RBI said it has reviewed risk weights on microfinance loans.

In November 2023, the risk weights on consumer credit, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, too was increased to 125 per cent.

"NBFCs and select banks received a boost after the Reserve Bank of India rolled back the increase in risk weights on bank loans to non-banking financial companies, sending shares of several NBFCs higher," Devarsh Vakil, Head of Prime Research, HDFC Securities, said.

Stock markets were closed on Wednesday for 'Mahashivratri'.

"Financials are the only major sector to post gains, especially NBFC and microfinance lenders, surged today as RBI eased capital norms for microloans and bank credit," Satish Chandra Aluri, Analyts, Lemonn Markets Desk.

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